Capital market history since 1926 shows that the annual rate of return on _____
ID: 1171304 • Letter: C
Question
Capital market history since 1926 shows that the annual rate of return on _____ has been more volatile than the annual rate of return on_____.
.
large company stocks; small company stocks
U.S. Treasury bills; small company stocks
U.S. Treasury bills; long-term government bonds
large company stocks; U.S. Treasury bills
long-term government bonds; small company stocks
Marple Movers announced that its next annual dividend will be $0.40 per share annual dividend. Dividends will be $0.60 and $0.75 a share over the following two years, respectively. After that the dividend are projected to increase at a constand growth rate of 2.5 percent per year. How much is one share of this stock worth at a rate of return of 14 percent?
.
$7.87
$6.84
$5.83
$8.06
$4.98
A.large company stocks; small company stocks
B.U.S. Treasury bills; small company stocks
C.U.S. Treasury bills; long-term government bonds
D.large company stocks; U.S. Treasury bills
E.long-term government bonds; small company stocks
Explanation / Answer
1-
D.
large company stocks; U.S. Treasury bills
because returns of small company stock were highly volatile and large companies returns were volatile over long ter treasury bonds
2-
Expected dividend in Year 4
.75*(1.025)
0.76875
Terminal value of stock at year 3
expected dividend in year 4 /(required rate of return-growth rate)
.76875/(14%-2.5%)
6.68
Year
cash flow
present value of cash flow at 145 = cash flow/(1+r)^n
1
0.4
0.350877
2
0.6
0.461681
3
0.75
0.506229
3
6.68
4.50881
present value of share
5.83
1-
D.
large company stocks; U.S. Treasury bills
because returns of small company stock were highly volatile and large companies returns were volatile over long ter treasury bonds
2-
Expected dividend in Year 4
.75*(1.025)
0.76875
Terminal value of stock at year 3
expected dividend in year 4 /(required rate of return-growth rate)
.76875/(14%-2.5%)
6.68
Year
cash flow
present value of cash flow at 145 = cash flow/(1+r)^n
1
0.4
0.350877
2
0.6
0.461681
3
0.75
0.506229
3
6.68
4.50881
present value of share
5.83